Background: Insurance and insurance transactions are governed by the Insurance Code (Code). Among other things, the Code requires that: (1) insurers meet certain financial requirements; and (2) agents, solicitors, and brokers of insurance comply with specified licensing standards. Financial and criminal penalties may result from noncompliance.

Certain transactions that fall within the definition of insurance are addressed by exemptions from the Code or the creation of a specific regulatory structure. Entities regulated under these chapters may not be required to comply with the same capitalization and reserve requirements, reporting and solvency oversight, and claims handling practices as are required of an insurer selling a traditional insurance product. Persons regulated under these chapters may not need to be licensed or have the same degree of training. Service contracts are one of the types of products that are regulated less stringently than insurance products under the Code.

A service contract is a contract for separate consideration for a specific duration to:

repair, replace, or maintain property; or
indemnify for the repair, replacement, or maintenance of property.

Registration. A service contract provider must register with the Insurance Commissioner (Commissioner). Application procedures, requirements, and fees are set forth. The Commissioner may suspend or revoke the registration of a service contract provider for failure to comply with the specific requirements.

Persons selling and marketing service contracts are not required to register with or be licensed by the Commissioner unless they are service contract providers.

Financial Responsibility for Service Contract Providers. A service contract provider may ensure that all obligations and liabilities are paid by choosing one of the following options:

insure its service contracts with a reimbursement insurance policy;
maintain a reserve account that includes a portion of the gross consideration received for all service contracts and give the Commissioner a financial security deposit;
use a risk-retention group to insure the contracts of a service contract with a reimbursement insurer policy; or
maintain or have the parent company maintain a net worth or stockholder's equity of $100 million.

Recordkeeping. A service contract provider must keep accurate accounts and records including the following:

the name and address of the person who purchased a protection product;
a list of locations where the service contract is sold or marketed; and
written claims files with the dates, amounts, and descriptions of claims related to service contracts.

Investigations and Enforcement. The Commissioner may investigate a service contract provider. Upon the Commissioner's request, a service contract provider must make the books, accounts, and records available to the Commissioner. The Commissioner may take actions to enforce the chapter and the Commissioner's rules and orders. A violation of the service contract laws is a violation of the Consumer Protection Act. A purchaser of a service contract may bring suit for a violation.